Mars Inc. is considering the purchase of a new machine that costs $60,000. This

Question

Mars Inc. is considering the purchase of a new machine that costs $60,000. This machine will reduce manufacturing costs by $5,000 annually. Mars will use the MACRS accelerated method (shown below) to depreciate the machine, and it expects to sell the machine at the end of its 5-year life for $10,000. The firm expects to be able to reduce net operating working capital by $15,000 when the machine is installed, but the net working capital will return to the original level when the project is over (i.e., after 5 years). Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. Calculate the net cash flows of the project. (Cash outflows should be negative number.)

Year MACRS Percentage 1 0.20 2 0.32 3 0.19 4 0.12 5 0.11 6 0.06

Explanation / Answer

Answer: Intial outlay :

Cost = -$60000

Change in working capital= +15000

CF0 = -45000

Adjusted basis after 5 years is =$3600

Terminal cash flow:

Year MACRS Percentage Depreciation 1 0.2 12000 2 0.32 19200 3 0.19 11400 4 0.12 7200 5 0.11 6600 6 0.06 3600

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